Helping Clients Sell Their Businesses: Maximizing a Company’s Value

Many clients look to you, their tax professional, to advise them on how, and when, to sell their business. After all, you should be very familiar with their company’s history, financials and other information.

Although the economy has delayed the exit plans for a few of our own clients, their need to exit at some point in the future has not gone away. Thankfully, most of them are delaying their sales decisions for the right reasons. Their businesses are beginning to improve, yet the value is not where it was just a few years ago when you look at the last three years of trailing earnings.

For a variety of reasons, not all business owners are seeing the value of their businesses improving. I have met many whose businesses have been structured and operated with tax legislation in mind. The profits have been kept low to minimize taxes. However, letting the “tax tail” wag the dog is not a strategy we would recommend.

For others, removing waste and investing in growth has not been a priority, thus reducing the value for a potential sale. There may be a reluctance to invest in leadership training or consulting services to develop growth capacity. For all of these scenarios, there is still a chance to capitalize on the owners’ hard work and investment of time and energy.

I have outlined 10 steps, grouped into three distinct phases, which are designed to help maximize a company’s value. See how many of these you can apply to your clients’ future sales.

Phase 1 – Optimum Performance (Steps 1 & 2)

Step 1: Improve the profitability of your business by removing waste. There is no point in putting more business through an incapable process. One of the key performance measurements of a company is how efficiently sales are converted into profits for the business.

Step 2: Grow the business on a positive trend line. Sales growth can provide confidence that the sales process is working well. Accordingly, to grow sales, the business must have a sales process that works. A plan to improve the sales process involves:

• Reviewing the product and market segments
• Reviewing the price points
• Training the sales force
• Developing a contact program
• Creating a detailed competitor analysis

At the end of phase one, the business performance is optimized, cash is created to fund phase two of the process, and the sales and profit trend lines show a continuous and predictable improvement.

Phase 2 – Polishing the Business (Steps 3-6)

The steps in this phase ensure all of the elements of a great business are in place.

Step 3: Make sure, wherever possible, the future revenue of the business is locked in.Preferably, this is through long-term contracts. A buyer of a business needs a degree of certainty with a five-year revenue outlook. Therefore, contracts with customers need to be robust.

Step 4: Establish a management infrastructure that removes reliance on the owner. In the absence of the owner, the management skills, experience and process to lead the business need to be in place.

Step 5: Protect the brand of the business. Mechanisms for this include a strong web presence, social media, patents and other intellectual property protection.

Step 6: Reduce the debt levels of the business in order to clean up the balance sheet. The cash created in Step 1 can be used to retire debt and remove loan balances.

Phase 3 – Creation of the Sale (Steps 7-10)

Now that the business looks as good as it can, it’s time to begin the process of selling it.

Step 7: Find a buyer who “needs” to buy the business. This is the key success factor in maximizing the sales price. Ideally, at this point, several potential buyers have been identified, and an analysis of why the business is essential for each potential buyer is carried out. This analysis often requires changes to the look and feel of the business. The information gained from the analysis enables a specific sales process for each potential buyer to be developed and implemented.

Step 8: Make sure the negotiation process goes well. Often, the business owner needs to be coached on their role in the sale. The psychology of the sales process must be clearly defined and followed. There’s no point in having built a valuable business just to poorly handle the negotiation of the sale.

Step 9: Anticipate all possible objections to be raised by the buyer, and any value-reducing tactics in the sales process. This is a part of the sales process planning.

Step 10: Manage the risk in the sales process. You can use a Failure Mode and Effect Analysis process to control all identified risks.

Following these 10 steps can help maximize the probability of getting a higher price for your client’s business. The timing of the exit is up to the owner, but a three- to five-year timeframe allows for applying the 10 steps in a way that ensures the best outcome. The initial sales strategy meeting allows an advisor to determine the potential value of the business. Having a clean set of books and records is critical to determining the true value of the business.